Are Dish Network, Sprint, T-Mobile US Operations Really Worth "Nothing?"

While assigning a value to a company is always based on some key assumptions, the present circumstances surrounding valuation of Dish Network, Sprint and T-Mobile US illustrate the huge role of assumptions.

Dish makes its money from selling video entertainment services. Its value normally is a multiple of the recurring revenue stream. The same sort of analysis works for Sprint and T-Mobile US, even if the services sold by those two companies are mobile communications services.

But on a "sum of the parts" perspective, the valuations are skewed. Looking only at the possible value of spectrum assets, all three firms are worth less than the value of their spectrum.

Because of the historically-high values spectrum was sold for in the recent AWS-3 auctions, we have the unusual situation where, at least conceptually, all three firms are worth more, as holders of mobile spectrum, than they are as going concerns.

In other words, looked at only from a spectrum valuation perspective, all three firms have a market value based on their actual revenue-generating operations that is less than the value of the raw spectrum.

In fact, the value of the operations might be negative.

Spectrum represents perhaps 80 percent of Dish Network’s equity value, even if that spectrum does not generate any revenue at all for Dish, at the moment, and all revenue comes from its satellite video entertainment business.  

Lance Vitanza, a managing director at CRT Capital Group LLC, agrees that the likely value of Dish’s spectrum, which he estimates at $45 billion, is higher than the market value (roughly $36 billion) or the enterprise value of $40 billion of the entire company.

Then consider Sprint. About $17.5 billion is the value attributed only to some excess 2.5-GHz spectrum Sprint might sell.

Keep in mind that in September 2014, Sprint’s equity value was about $22.5 billion. In other words, Sprint could now be valued at less than its spectrum holdings.

Bloomberg Intelligence, in fact, estimate the total value of Sprint’s 2.5-GHz spectrum alone at $115.1, about 2.4 times Sprint’s enterprise value of $48 billion.

In fact, some argue that T-Mobile US  spectrum accounts for more than 100 percent of its total market value.

Those are anomalies, for certain. Few investors would actually assume that the operating value of the businesses really is worth less than the value of spectrum holdings. But that is how the situation might be construed.

Fight OTT or Embrace it? NBCUniversal Seeks Middle Path

In an important shift, The advent of voice over Internet Protocol has forced legacy voice providers to choose between “joining” or “fighting” the trend. The rise of third party messaging platforms likewise has forced mobile service providers to ponder a similar choice: join in the trend, or not.

In a somewhat similar way, Comcast’s NBCUniversal unit has had to decide whether it would join the streaming delivery business, or not. In a modest way, it has decided to launch a niche streaming service.

Comcast Corp. ’s NBCUniversal is aiming to launch a comedy-focused over the top video service later in 2015.

The comedy service would likely feature full episodes of NBC shows such as “The Tonight Show” starring Jimmy Fallon and “Saturday Night Live.”

Original and exclusive content is envisioned. NBCU apparently has not decided on a price point, but a range of $2.50 to $3.50 per month is possible.

That niche approach is not an instance of NBCUniversal cannibalizing its linear video business, as the offer is for a new niche channel that will not be available to linear video distributors.

Unlike the cases of VoIP and instant messaging, NBCUniversal has not had to make a full choice between legacy products and replacement products.

Still, the move is one more sign that a shift to streaming is coming.

Network Neutrality Might Interfere with 5G: Uh oh.

Nobody yet knows what is contained in the 332-page Federal Communications Commission decision on network neutrality. Given the certain round of lawsuits, nobody knows whether the rules, or what parts of the rules, might ultimately be sustained. Nobody knows whether Congress might intervene at some point.

Assuming the rules eventually are sustained, or that major Internet service providers conclude they have to build their businesses as though some version of the rules will be in place, what are the outcomes?

Some believe European service providers might gain some global advantage, as European regulators seem to be heading in the other direction--lessening regulatory burdens--and creating more clear incentives for investment by ISPs.

The extent to which the current European Union vision of fifth generation networks will be realized remains unclear. The good news is that the vision is breathtaking. The bad news is that the  vision is breathtaking.

Telcos have a spotty record where it comes to next generation network visions.

That vision is that 5G will integrate networking, computing and storage resources into one programmable and unified infrastructure.

Some might say that would be the culmination of a multi-decade movement towards a unified “communications and computing” best exemplified, for example, by cloud computing, where the computing infrastructure and communications infrastructure are hard to extricate.

That is explicit in calls for a network protocol that features “dynamic usage of all distributed

resources,” as proposed by the 5G PPP. That is only part of a vision that incorporates flexibility, spectrum efficiency, sustainable, scalable, energy efficient access across optical, cellular and satellite networks.

As envisioned, 5G will heavily rely on emerging technologies such as Software Defined Networking (SDN), Network Functions Virtualization (NFV), Mobile Edge Computing (MEC) and Fog Computing (FC).

The plan explicitly calls for use of frequencies above 6 GHz, to support end user bandwidth as much as 1,000 times more than is available today.

The caution is that telecom companies have had major issues when rolling out new “next generation networks.” Failure is more common than success. Recall that ISDN, broadband ISDN (ATM) and  IP Multimedia Subsystem (IMS) all were seen as “next generation network” protocols.

Now some observers worry that network neutrality rules could interfere with the 5G vision of seamless services provided across seamless networks. That is possible. But it is far more likely that ISPs and application providers will simply move to create managed services that are not covered under the rules.

That might work fine if a managed service is provided only on one network. But if required to work across any network, while retaining all the features, use of “best effort only” access as mandated by network neutrality rules might prevent the interworking.

Unforeseen consequences were virtually inevitable.

IoT, OTT Mobile Video Will Drive Incremental Revenue for Verizon

Exhaustion of the older revenue models and products means firms such as Verizon increasingly will rely on new services to drive revenue growth in the future, Verizon CFO seems to agree.

Incremental subscriber account additions have been the most important measure of mobile service provider growth, as access lines once were the most-convenient shorthand for the health of a fixed line telco, or basic subscribers once were the easiest way to assess the value of a cable TV company.

All that has changed. These days, with bundles of products being the key strategy, units matter more than subscribers or lines in service, to a large extent.

"It's not just going to be about the net adds anymore," Fran Shammo, Verizon Communications CFO said.  

Instead, new products and services built around the Internet of Things and "mobile first" over the top video are going to drive incremental revenue growth. The emphasis on IoT is shared with AT&T.

In fact, IoT revenue is growing almost 45 percent year over year, Shammo said.

The view about video contrasts with AT&T’s strategy, as AT&T believes linear video subscriptions will throw off significant cash flow for quite some time.

Netflix Shows "Principles" are Not What Net Neutrality is About: Business Advantage is the Issue

Are zero-rated apps wrong? Are zero-rated apps a violation of network neutrality, or the principle that all consumer apps should be treated equally? Some do not believe that is the case.

Facebook, through Internet.org, or example, is offering a package of zero-rated apps, in partnership with mobile service providers, in a number of countries.

Zero-rated apps can be used, in such cases, even when a consumer does not buy a mobile Internet access plan. Netflix has complained about such practices, in the U.S. market.

Oddly, then, Netflix, a big backer of the strongest forms of network neutrality, including a ban on zero rating, is negotiating deals with Australian Internet service providers doing exactly that.

As part of that deals with Australian ISPs,  Netflix usage does not count against a usage cap. Netflix is, in other words, zero rated.

The issue is not consistency, though Netflix is being inconsistent. The issue is not the merit of zero rating, since Netflix is on both sides of that issue, in different markets.

The issue is that, apparently, a particular firm’s particular interests dictate the positions that firm takes. To be sure, that makes sense, to a large extent. One wouldn’t expect a firm to support business rules of the game that harm its core interests.

On the other hand, it is rather odious when such expressions of self interest (and I have no problem with expressions of self interest) are cloaked in the language of higher principles.

Network neutrality is no different than any other battle over business rules. It is not about virtue.

Which Way for Sprint?

Sprint’s “Cut Your Bill in Half” marketing campaign is getting attention. Whether it also is getting a commensurate rate of conversions is an important issue.

Of total Compete panel traffic to Sprint’s site in December 2014, 13 percent of visitors also viewed the “Cut Your Bill in Half” pages.

The visits did not necessarily immediately translate into Verizon and AT&T customers making a switch of provider.

Of all visitors to Sprint’s domain in December, only four percent started the process to become a Sprint customer by taking steps to upload their bill on the website. On the other hand, Millward Brown Digital suggests, making such a switch might be complex enough that many wanted to visit a retail store to complete a transaction.

Nor does it appear that the potential switchers are lower income, highly price conscious consumers. The analysis by Millward Brown Digital suggests more than 50 percent of AT&T and Verizon customers who visited Sprint’s “Cut Your Bill in Half Event!” page had an annual income over $60,000, with 22 percent of those customers earning $100,000 or more annually.

The suggestion is that people checking out the promotion might include some of the better customers Verizon and AT&T want to retain. That is a positive.

To be sure, some question whether Sprint strategy can work. Among the doubters is BTIG Research analyst Walter Piecyk. “We do not see a path by which Sprint can return to revenue growth, let alone EBITDA growth or positive free cash flow,” Piecyk said.

As one example, Verizon's mobile operating margin in recent quarters has been  24 percent. AT&T mobile operating margin was 17 percent. Sprint's operating margin was a negative 7.6 percent.

Sprint is doing better in terms of subscriber acquisition. But T-Mobile US, with its own market attack,  is likely taking big chunks out of Sprint's subscriber base.

For 2014, T-Mobile had a porting ratio of 2.2 versus Sprint, meaning for every subscriber that left T-Mobile US for Sprint, 2.2 subscribers left Sprint for T-Mobile US.

Against AT&T and Verizon, T-Mobile US has a porting ratio of 1.8 and 1.4 respectively.

Sprint lost over two million postpaid handset subscribers and T-Mobile US gained four million postpaid handset subscribers in 2014. In other words, the net swing between Sprint and T-Mobile is about six million.

Still, optimists argue that recent network upgrades, including 9,000 Long Term Evolution sites, plus the aggressive retail pricing cutting, plus some evidence its network coverage and quality  are starting to be seen, will allow Sprint to start adding net subscribers.

Also, Sprint CEO Marcelo Claure recently purchased five million Sprint shares, suggesting Claure, at least, sees equity price upside.

Will IoT Services Use Internet, or Managed Networks?

It remains to be seen whether U.S. network neutrality rules will survive court challenges, and what modifications ultimately will be made to any surviving portions of the rules.

Also unknown are paths of development for future services--including many Internet of Things apps with high reliability requirements--that can be created and offered by Internet service providers and telcos, as managed--not Internet--services.

But it might not be the case that self-driving cars use communications covered by network neutrality, any more than some medical monitoring or other sensor services might. A good argument can be made that such services will be supported by quality-assured networks, not the unmanaged Internet.

"There are some services that simply require a different level of connectivity," said Suri. He believes there are some networks that "you can't do in a best effort network," naming driverless cars and healthcare communications with doctors and hospitals connecting to patients. "You need this differentiated quality of service," he said.

No doubt, ISPs will have financial incentives to create managed services in such cases, and thus would not be covered under any surviving network neutrality rules.